Are You Ready for Tax Season? 7 FAQ’s Answered for Small Businesses

While some small business owners are great at keeping their books straight, others are so focused on running their business that taxes end up on the back burner. Whichever category you fall into, tax season for small businesses is right around the corner and it's important to be prepared. From construction companies and restaurants, to tutoring services and coffee shops, here are answers to a few frequently asked questions when it comes to small business taxes.   

What are business taxes?

Let’s start with the basics. Business taxes, as the name suggests, are tariffs the government imposes on companies and businesses. Different types of businesses are required to pay different taxes. Typical business taxes include Excise Tax, Employment Taxes, Self-Employment Tax, and Income Tax.

I need to file taxes for my business. Where do I start?

This also some what depends on the type of business you run. Important steps include determining if your operation is a business or a hobby, compiling records from business operations, knowing which taxes you need to pay and which you don’t, and deciding whether you will do your own taxes or hire a professional.

How do I know which expenses are tax deductible and which aren't?

The IRS defines business expenses as “ordinary and necessary” for your office to operate. Basically, ordinary expenses are products and services that most people in your business use and need. If you’re in construction, you ordinarily need saws, hammers, and screws. If you’re a dentist, you probably need office space, furniture, and dental tools. Necessary expenses are those that are useful and appropriate to your company. The IRS says expenses “do not have to be indispensable” to be defined as “necessary.”

My business entertains a lot of our clients including expenses spent on food and beverage, lodging, etc. Can I claim a deduction for this?

You can typically deduct 50 percent of your unreimbursed business expenses. These activities must be ordinary and necessary and also be directly related or associated to your business. Directly related expenses are intended to conduct business, engage in business during the entertainment, and have foreseeable benefits for your company from doing this business. This could be taking a client to lunch to discuss future plans for your services. Associated entertainment expenses are defined as associated with active business and in close time proximity with business discussion. An example could mean purchasing a client coffee before a business meeting at your office.  

I use my car for both business and non-business related purposes. Is my car a tax deductible expense?

If you use the same car for business and non-business related purposes, you can only deduct your business use on your business taxes. For example, if you have to drive to the next county for a meeting and use your personal car, you can deduct the time spent driving to the conference. You can do this by deducting a standard mileage rate or calculating the actual expense of operation, which includes gas, oil, insurance, license, depreciation and other expenses. Alternatively, if for example you have a large truck that you only use for hauling, towing, or other solely business related functions, you can deduct the entire expense. If you also use that truck to drive to work everyday, pick up the carpool and take your friends fishing, you cannot deduct the entire cost of the truck, only time spent on the clock.  

What can’t I deduct?

There are also some expenses that relate to your business that you cannot deduct from your taxes. Some of these include clothes or gear you wear to work, your typical commute to and from the office, coffee and lunch at work when you’re not entertaining a client, and some technology including widgets and gadgets that aren’t vital to your business.

What are some other deductions my company may be eligible for?

There are many other potential small business related deductions. These can include office space rentals and utilities, parking and tolls, home offices, legal fees, freight and shipping costs and more. A full list can be found on our website.

Filing your business taxes can be a difficult and confusing process, but it doesn’t have to be. At Honest Buck, we’re here to help you make sure you pay all necessary fees and reap the benefits of potential deductions. If you’d like to make filing small business taxes a little easier this year contact us today!

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